Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: July 2017

THE DAILY EDGE (20 July 2017)

U.S. Housing Starts Jumped in June

Housing starts rose 8.3% in June from the previous month to a seasonally adjusted annual rate of 1.215 million, the Commerce Department said Wednesday.

Residential building permits, which can signal how much construction is in the pipeline, increased 7.4% to an annual pace of 1.254 million last month. That was the largest one-month jump since November 2015. (…)

Housing starts in the first six months of 2017 were up 3.9% from the same period in 2016. Permits during this period increased 6% from a year earlier.

Starts rose 6.3% in June for single-family construction and increased 13.3% from May for multifamily construction. Permits last month were up 13.9% for buildings with multiple units and up 4.1% for single-family homes. (…)

The increased pace of multifamily construction could create additional challenges for apartment landlords, who already are struggling with tepid rent growth and rising vacancies due to an increase in rental units. The national vacancy rate climbed to 4.4% this spring from 4.2% a year earlier, according to data released by Reis Inc. this week. Average rents across the U.S. increased 3% year-over-year in the second quarter to $1,335 a month, the smallest year-over-year increase since 2011. (…)

From Haver Analytics:

By region, starts in the Northeast strengthened 83.7% (38.6% y/y) to 158,000, the highest level since October. In the Midwest starts, increased 22.0% (9.0% y/y) to 205,000, a seven month high. Starts in the West improved 1.6% (6.0% y/y) to 319,000, the highest level since February. Starts in the South declined 3.8% to 533,000 (-9.2% y/y), the fifth consecutive monthly shortfall.

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  • Starts Gain Too Little, Too Late for Second-Quarter GDP

A sharp rebound in housing starts in June, following three months of declines, will not provide enough of a boost to overall residential investment in the second quarter to maintain the first quarter’s stellar pace.

Residential investment jumped by a solid 13 percent in the first quarter, contributing 48 basis points to GDP growth of 1.4 percent in the period. But in the second quarter, housing starts declined and home sales slowed (albeit offset by strong residential-renovation growth), implying that residential investment likely advanced by less than half of the previous quarter’s pace.

The silver lining of the June housing starts report is a strong rebound in single-family permits, which provides reason to believe that the soft patch in the second quarter will prove to be temporary. With growth in multifamily construction slowing amid falling demand and record supply, home construction will increasingly have to rely on single-family units. (…) (Bloomberg Briefs)

 Significant growth in the number and share of households renting their home since 2006 About two-thirds of households headed by young adults are rentals
Low Earners Are Making the Biggest Gains for the First Time in Years For the first time in years, pay for lowest-income Americans is rising faster than for other groups. Weekly pay for earners at the lowest 10th percentile of the wage scale rose at a faster rate last quarter, from a year earlier, than any other group.

(…) Last quarter marked the first time since late 2010 that this earning group’s gains outpaced all others. Usual weekly earnings for workers ages 25 and older at the bottom of the pay scale rose 3.4% from a year earlier in the second quarter, according to analysis of newly released Labor Department data. That was stronger than median gain of 3.2% and the 3.1% improvement for workers at the 90th percentile, who earn more than nine in 10 other Americans. The percentage increases are based on a four-quarter average of earnings, to smooth out volatility in the data. (…)

Usual weekly earnings is a different wage measure than the more broadly cited average hourly earnings figure reported in the jobs report each month. The jobs report showed average hourly earnings for hospitality workers, the lowest paid of 19 broad sectors tracked monthly, rose 4% in June from a year earlier, the second-strongest gain. The quarterly numbers, which tend to be volatile, are based on a survey of workers and include overtime pay, commissions and tips that might not be captured in the hourly figure.

Average hourly earnings, which have been stuck near a 2.5% annual increase for most of the past year and a half, are based on a separate survey of private-sector employers. (…)

At the start of the year, the minimum wage increased in 19 states, and Maryland and Oregon raised their pay floors this month.

Still, higher-earning Americans have fared much better during the expansion. Pay for workers in the 90th percentile has increased nearly 20% since mid-2009, better than the median gain of 16.3%. The 10th percentile worker fared worse, with pay improving 12.5%. That hasn’t been enough to offset inflation during the past eight years. (…)

Here’s Why Yellen’s Fed Cares About America’s Opioid Epidemic

(…) The opioid epidemic falls outside of the Fed’s traditional macroeconomic purview, yet it matters to the central bank for two reasons. If addiction is rendering people unemployable, it could help to explain why a historically low portion of the prime-age population is working. Second, the Fed has increased its focus on community and workforce development in recent years — and the opioid crisis is a painful reality dragging on human capital across America.

An estimated 2.7 million adults over the age of 26 were misusing painkillers as of 2015, while another 236,000 currently used heroin, based on test Substance Abuse and Mental Health Administration data. While opioid abusers account for a tiny sliver in a workforce of 160 million, they probably make up a great share of the 7 million who are unemployed. (…)

Economic Outlook from Freight’s Perspective – Continues to Show Strength

Not only have both the Shipments and Expenditures Indexes have now been positive for six months in a row, but they are showing accelerating strength. (…) The 4.8% YoY increase in the June Cass Shipments Index is yet another data point which confirms that the first positive indication in October was a change in trend. In fact, it now looks as if the October 2016 Cass Shipments Index, which broke a string of 20 months in negative territory, was one of the first indications that a recovery in freight had begun. (…)

What specifically is driving recent volumes? Parcel volumes associated with e-commerce continue to show outstanding rates of growth, with both FedEx and UPS reporting strong U.S. domestic volumes. According to the proprietary Broughton Capital index in the most recent month available (May), airfreight has also been showing improving strength, with the Asia Pacific lane jumping 12.3% and the Europe Atlantic lane growing 4.3% on a YoY basis. As we have described in previous reports, the strength in the Asia Pacific lane buoys our confidence in continued strength in the tech sector, and continued improvement in the Europe Atlantic lane buoys our confidence in the continued growth, albeit modest, in the overall European Union economy.

The recent surge in Asia Pacific airfreight gives us increasing confidence in the technology segment of the global economy, not because everything that moves in this lane is a semiconductor, but because the largest overall segment/type of good that is moved via airfreight in this lane has one or more semiconductors in it. Hence, there historically has been a high level of correlation between Asia Pacific airfreight and semiconductor billings. This is good news for economies in Asia, and good news for the technology segments of the U.S. economy. (…)

After a very strong start to 2017, the Association of American Railroads (AAR) reported that for the trailing four weeks, YoY overall commodity carloads originated by U.S. Class 1 railroads grew by 3.0%, and even intermodal units grew by 4.9%. (…)

[Trucking] Tonnage itself appeared to be growing and gaining momentum (three-month moving average reached +3.1% on a not seasonally adjusted basis in January). Unfortunately, the months since have been both volatile and inconsistent: February, March, April, May, and June tonnage was -2.7%, 1.1%, -1.2%, 4.8%, and 1.6%, bringing the three-month moving average down to just 1.7%.

Dry van truck loads have now contracted on a YoY basis six out of the last eight months and eight out of the last ten months. The most recent month (April) reported by the American Trucking Associations (ATA) was down 2.4% and pulling the three-month moving average even further negative to -1.9%. But fear not, recent data out of DAT Solutions suggests that this may be getting better in June.

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Oil Struggles After Rise in U.S. Output Crude prices ticked lower Thursday as the market came under pressure from increased U.S. production, despite signs of a drawdown in stocks.

Data from the U.S. Energy Information Administration on Wednesday showed U.S. production rose by 32,000 barrels a day in the week ended July 14 to its highest level in two years. (…) Data from the U.S. Energy Information Administration showed U.S. stockpiles fell for a 13th week out of the past 15. Weekly decreases in gasoline and distillate stocks also surpassed estimates. (…)

Charts via The Daily Shot:

State-run China Petroleum & Chemical Corp., the globe’s largest oil refiner, will process about 1 million metric tons a month less than previously planned over June to August, according to people with knowledge of the matter. That’s because of weaker demand and increased competition from privately owned rivals, they said, asking not to be identified because the information is confidential. The reduction is equivalent to about 240,000 barrels a day.

While that’s about 3 percent of China’s total crude imports, the curbs are being implemented during the summer, when the nation’s demand typically peaks just as it does in the U.S. (…)

Tech Stocks Eclipse Record From Dot-Com Era Tech stocks broke a nearly two-decade-old record, with the S&P 500’s information-technology sector closing above its previous all-time high set in March 2000 at the peak of the dot-com bubble.

You Are Here

It has been a great start to 2017, with the S&P 500 Index up more than 11% year to date, but be aware that the index has, on average, peaked near here going back the past 20 years before regrouping for a fourth quarter run-up. Per Ryan Detrick, Senior Market Strategist, “The first half of July has been strong.  Check that off for working in 2017, but be aware that the S&P 500 has tended to peak around now and the next few months can be tricky.”

  • And that via The Daily Shot:

Based on seasonal patterns, volatility is expected to start rising in the next few weeks.

Source: @bespokeinvest

THE DAILY EDGE (26 July 2017)

Note: strangely, yesterday’s Daily Edge never made it to the blog. It is thus incorporated in today’s post.

Dodge Construction Index Shows Weakening Trend in Mature Market

Construction starts rose four percent in June according to the Dodge Index of New Construction.

For the second quarter, construction starts are down substantially. The overall trend is also down, indicative of a mature market. (…)

U.S. New Home Sales Rise as Prices Fall Sharply

Sales of new single-family homes improved 0.8% to 610,000 during June following a 4.9% May increase to 605,000, revised from 610,000. Despite the rise, sales were 4.4% below the March peak. (…)

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Home-Price Growth Flattened in May Home-price growth flattened across the U.S. in May, a sign that the rapid upward trajectory in the cost of buying a home may finally be coming to an end.

The S&PCoreLogic Case-Shiller Indices, which covers the entire nation, rose 5.6% in the 12 months ended in May, identical to a 5.6% year-over-year increase reported in April. The 10-city index gained 4.9% over the year, down from 5% in April, and the 20-city index gained 5.7%, down from 5.8% the previous month. (…)

Month-over-month, the U.S. Index rose 1% in May before seasonal adjustment, while the 10-city rose 0.7% and the 20-city index increased 0.8% from April to May.

After seasonal adjustment, the national index rose 0.2% month over month, the 10-city remained stagnant and the 20-city index rose 0.1%.

After seasonal adjustment, 14 of 20 cities saw prices rise in May. (…)

Who benefits most from state and local tax deduction?

Republicans are trying to eliminate the federal deduction for state and local taxes as part of a package to overhaul America’s tax system. Almost 44 million people claimed the deduction in 2014.

The U.S. average deduction is $11,846. Amounts by state here.

EARNINGS WATCH

As of yesterday morning from Thomson Reuters:

  • 171 companies had reported with a 78% beat rate.
  • The blended growth rate is now 9.9% on EPS and 4.7% on revenues. The EPS surprise factor is +6.8% overall.
  • Q2 estimates have risen from +8.0% on July 1 to +9.9%.
  • Q3 estimates are declining from +8.6% to +7.4% but Q4 are only shaved from +13.1% to +12.3%.
  • Trailing EPS are $125.09 and are seen reaching $131.09 for 2017 as a whole.

Don’t miss my recent post: About Price/Sales, Profit Margins (and John Hussman)

From JP Morgan:

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(…) According to Thomson Reuters, 77.8 per cent of US S&P 500 companies to have reported so far have beaten consensus earnings expectations. The historic average is 63 per cent, and this is set to be the most positively surprising earnings season since the third quarter of 2009, when 78.9 per cent of companies managed to surprise the Street amid the first rebound from the crisis. (…)

Meanwhile in Europe only 43.5 per cent Stoxx 600 companies have managed to beat their earnings estimates, and earnings “momentum” — the rate at which estimates are rising or falling — has been negative since early last month. (…)

Over the past decade — almost exactly matching the period of the crisis and post-crisis — European earnings have fallen by some 53 per cent, while US earnings have risen by 27 per cent. (…)

As it stands, European earnings are on course for a respectable 7.1 per cent rise from last year’s second quarter, although this falls to 4.4 per cent if energy excluded. (…)

The British-Dutch company’s equivalent of net profit rose to $1.9 billion in the second quarter, compared with $239 million at the same point last year and its cash flow from operations soared to $11.3 billion. The company said it has generated $38 billion of cash from its business over the last 12 months, enough to cover dividend payments and bring down debt levels. (…)

Total’s profit for the quarter was $2 billion, roughly the same as last year, but the company also reported a significant increase in cash flow from operations to $4.6 billion and a reduced debt ratio.

Statoil said it earned $1.4 billion in the second quarter, compared with a loss of $302 million last year. The company said it generated $4 billion in free cash flow and reduced net debt by 8 percentage points since the start of the year, despite oil prices remaining around $50 a barrel.

Though notably better than at the start of 2016 when the price of crude plummeted to $27 a barrel, oil is still more than 50% weaker than in 2014 when prices started to fall. (…) The oil-company earnings on Thursday reflect a years long campaign across the industry to bring down costs and spending to a point where the companies can operate profitably in a lower-oil-price environment.

It’s an effort that remains ongoing.

Shell said it intends to maintain tight capital discipline going forward and will continue to focus on bringing down costs and capital efficiency. Statoil said it expects costs to continue to improve this year and to squeeze out an additional $1 billion in efficiencies.

  • Here is the latest crude oil cost curve. It’s difficult to see the US crude price rising substantially above $55-$60/bbl (for a sustained period) in the near-term. There is a massive amount of additional production that will kick in at these levels. (The Daily Shot)

Source: Goldman Sachs, @MattGarrett3

Facebook: Enjoy Rapid Growth While It Lasts After a big run-up in its shares, Facebook needs a new jolt of revenue growth to keep impressing investors

Surprised smile The social-networking giant on Wednesday reported second-quarter earnings and revenue that exceeded analysts’ expectations. Its monthly active user base now exceeds two billion people. For some perspective, the population of people in the world between the ages of 15 and 64 living in countries where Facebook isn’t banned is only about twice as high.

Some 66% of Facebook’s monthly active users continue to visit it daily. But while 45% top-line growth from a year earlier and 24% growth in average revenue per user would be impressive for almost any company, those figures represented Facebook’s slowest growth since the third quarter of 2015. Growth in daily and monthly active users also slowed sequentially. (…)

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CANADA
Loblaw sees higher minimum wage rules hitting profit

Loblaw Companies Ltd. says minimum wage increases in Ontario and Alberta and health care reform in Quebec are expected to hurt its bottom line.

The grocery and drug store operator says the minimum wage increases announced in Ontario and Alberta are expected to increase its labour expenses by about $190-million in 2018.

Loblaw also says changes in Quebec are expected to have a more significant incremental impact in 2018 than in prior years. (…)

(…) Each 30-pound robot is equipped with sensors to help it navigate the store’s layout and avoid bumping into customers’ carts. When it detects product areas that aren’t fully stocked, the data is shared with store management staff so the retailer can make changes, said Dave Steck, Schnuck Markets’ vice president of IT and infrastructure.

The primary focus of the data collection is to determine the store’s in-stock position, but other shelf data such as price errors may also be examined. (…)

Fed Ready to Shrink Bond Portfolio as Soon as September

The rate-setting Federal Open Market Committee said it expects to begin shrinking the bondholdings “relatively soon,” using a phrase that often has preceded action at the next policy meeting. (…)

Officials offered little indication that several weak inflation readings had altered their plans to raise short-term interest rates once more this year. They voted unanimously to leave their benchmark rate in a range between 1% and 1.25%. (…)

The statement issued after a two-day FOMC meeting noted the recent weakness in inflation but didn’t deviate significantly from the statement released after last month’s meeting. (…)

The Fed won’t actively sell assets. Instead, it will allow a preset amount of holdings to mature every month without reinvestment. The amounts allowed to mature would initially be set at a relatively low level—$10 billion a month—and they would increase every quarter by $10 billion up to a maximum of $50 billion. Officials have said they want the plan to run quietly in the background once it starts. (…)

As PE Dry Powder Hits Record High, Purchase Price Multiples Also Grow

As sponsors sit on piles of cash they want to put to use—private equity dry power as of May increased to a record $906 billion—PE shops have had to pay up on secondary deals (and on any LBO this year).

The average purchase price multiple on sponsor-to-sponsor transactions in 2017 is 10.6x, up from 10.4x in 2016 and the most since LCD started tracking this data (it was 9.4x in 2007). The average PPM on all 2017 LBOs was 10.3x (also the most on record). (…)

Purchae Price Multiple Chart

The Myth of Trump’s Do-Nothing Presidency

Six months into his presidency, Donald Trump’s detractors portray him as a do-nothing president with no big wins on issues such as health care, taxes and infrastructure.

That may be true if the benchmark is legislation, but that is an incomplete benchmark. To gauge a president’s impact you have to go beyond the laws he signs to the vast authority he wields through departments and agencies that apply the law. On that score, Mr. Trump is on track to do a lot. On finance, the internet, immigration and drugs, to name just a few issues, Trump appointees have begun nudging the economy and the country in a more conservative, pro-business direction. (…)

In Mr. Trump’s first six months, rule-making has changed dramatically. The latest update on regulatory actions released last week by the White House Office of Management and Budget contained 1,731 preliminary, proposed or final rules, down 40% from its peak under Mr. Obama in 2011 and a 17-year low, according to Sofie Miller of George Washington University’s Regulatory Studies Center. Many actions taken under Mr. Trump are actually reversals of earlier rules. Ms. Miller says of 66 completed actions at the Environmental Protection Agency, a third were rule withdrawals. (…)

Trump has kept his promises — to Wall Street

Donald J. Trump made many promises during his successful campaign for the presidency, but according to a running tally from PolitiFact, he has kept less than 10%. (…)

But he has kept his word to Wall Street, which overwhelmingly opposed him in 2016, showing uncharacteristic discipline and diligence in attempting to dismantle the Dodd-Frank Act, passed by Congress and signed by President Barack Obama in 2010. (…)

Here’s what the Trump administration and Congress are doing to help Wall Street and big banks, an industry that contributed 13 times as much to Hillary Clinton’s campaign as it did to Trump’s, according to OpenSecrets.org:

• Last month, the House of Representatives passed the Financial Choice Act, which would exempt stronger institutions from restrictions on risk taking; replace Dodd-Frank’s methods of liquidating failing banks; gut the reviled Consumer Finance Protection Bureau, and eliminate the new fiduciary rule, which requires investment advisers of retirement accounts to act in the best interests of their clients.

• In April, the president signed executive orders that ordered the Treasury Department not to use its liquidation authority to bail out insolvent banks and imposed a 180-day moratorium on designating financial institutions that aren’t banks as “systemically important” and thus subject to greater oversight. Both the president and Treasury Secretary Steven Mnuchin acknowledged those orders were largely symbolic.

• The president nominated Randal Quarles as Federal Reserve vice chairman of supervision, a post created by Dodd-Frank that hasn’t been officially filled since 2010. If confirmed by the Senate, Quarles will oversee the Fed’s financial regulation, or deregulation: he has opposed higher capital standards for banks.

• In what could be Wall Street’s biggest victory, Gary Cohn, director of the president’s National Economic Council, may have the inside track to succeed Janet Yellen as Fed chair next year. Putting the former Goldman Sachs president in charge of the Fed’s much-enhanced regulatory authority under Dodd-Frank (you can bet they won’t repeal that now) would only cement the dominance of the Vampire Squid in this administration. I’m sure the president’s ardent supporters in Youngstown, Ohio, would be thrilled. (…)

Still missing:

Source: Moody’s Investors Service (via The Daily Shot)

How the Auto Industry is Catching Up with Tesla
US House votes overwhelmingly for Russia sanctions Europeans fear impact on pipelines and other energy projects if Trump signs bill
Russia Warns of ‘Painful’ Response If Trump Backs U.S. Sanctions
Foxconn Makes First Major U.S. Investment With $10 Billion Factory The maker of iPhones and other gadgets for Apple plans to build a plant in Wisconsin that a White House official said will initially bring 3,000 jobs to the state.

Contact: edgeandodds [at] gmail.com